China likely to delist more problematic companies in 2016

PUBLISHED : Tuesday, 22 March, 2016, 10:50am
UPDATED : Wednesday, 23 March, 2016, 10:27am

China may force out more problematic listed companies in 2016 as Beijing strengthens the crackdown on market irregularities, and the Shanghai Stock Exchange on Monday for the first time delisted a company for breaching disclosure rules.

A regulatory source told the South China Morning Postthat China’s top securities watchdog, the China Securities Regulatory Commission (CSRC) has compiled a blacklist of 30 to 40 troublesome companies, and has been probing these companies, talking to local government officials, to push forward delisting of unqualified firms.

The CSRC issued stricter rules over delisting arrangements at the end of 2014, and clarified that companies with major law-breaking activities, or that failed to meet financial and trading standards would face mandatary delisting.

However, only two companies have been forcibly delisted since then, while seven companies applied for voluntary delisting.

On Monday night, the Shanghai exchange announced the compulsory delisting of Zhuhai Boyuan Investment. It was the first company to be delisted for breaching information disclosure rules.

Specifically, Zhuhai Boyuan was accused of forging commercial bills, fraudulent accounting, and inflating deposits and shareholders’ equity between 2010 to 2014, the exchange said in a statement.

The delisting of [Zhuhai Boyuan] can be taken as a weather vane, that the authorities are adopting a more serious stance against unqualified companies
Guo Shiliang, commentator

“It is likely that the new CSRC chairman will adopt a harder stance on delistings, to clean up the market, and introduce a healthy and normal investment style,” the source said.

“Local governments are keen to keep the number of listed companies. On the other hand, being listed is also a precious resource based on China’s current approval-based system for initial public offerings, and many companies with delisting risks would seek back-door listing partners,” he said.

Guo Shiliang, an independent financial commentator, said only fewer than 100 companies have delisted from China’s stock market since 2001, the ratio was too small compared to the more than 2,800 listed companies.

“The delisting of [Zhuhai Boyuan] can be taken as a weather vane, that the authorities are adopting a more serious stance against unqualified companies,” Guo said.

It is very important to eliminate the problematic companies from the market, and improve information disclosure if China is to further push for reform in its capital markets, including shifting the approval-based initial public offering system to registration-based, he said.

China’s stock markets have been troubled by speculation of the so called junk shares, referring to shares of companies with bad business performance which are easily manipulated owing to their relatively smaller liquidity and size.

Punters would build heavy positions in companies under “delisting warnings”, as they were rarely delisted, providing an implicit floor on downside risk that speculators have exploited to their advantage.

The CSRC started investigations into Zhuhai Boyuan on June 17, 2014 and transferred the case to the public securities authority on March 26 last year. The CSRC held a press briefing on March 27 on the subject.

Shares of Zhuhai Boyuan were suspended from trading by the Shanghai exchange on May 25, 2015. Before that, the shares traded with a delisting risk alert for 30 trading days, the statement said.

During the period, the company’s shares hit their daily downward trading limit of 5 per cent for eight consecutive sessions after it notified investors about the risk of delisting, but then hit its upward limit of 5 per cent in the eight days following as many retail investors jumped in, betting the company would be able to save the listed status.

After the delisting announcement, shares of Zhuhai Boyuan will return for pre-delisting trading for 30 days from March 29, and later will be transferred to the over-the-counter market for trading, the Shanghai exchange said.